New Look at Conrail Deal Sought

WASHINGTON — Sen. Strom Thurmond, chairman of the Senate Judiciary Committee, called Wednesday for a new Justice Department assessment of the proposed sale of Conrail to Norfolk Southern Corp. after the department's top antitrust lawyer disqualified himself from further involvement with the merger.

Thurmond (R-S.C.) said such action was necessary "to remove any perception of impropriety" since Paul McGrath, assistant attorney general for antitrust, withdrew from the case late in the day in face of conflict-of-interest questions.

In a letter to Thurmond, McGrath said he disqualified himself after discovering that the law firm he will return to next week--Dewey, Ballantine, Bushby, Palmer & Wood--is doing tax work for Norfolk Southern. McGrath said he learned of the link after being questioned about it at the Senate Judiciary Committee hearing earlier Wednesday.

"As I indicated at the hearing, I had not heard previously about any such representation nor have I discussed the Conrail-Norfolk Southern matter with anyone at Dewey, Ballantine," McGrath said in his letter.

McGrath explained further that his division's analysis of the antitrust implications of the proposed merger was completed in January, before the firm was retained earlier this month to do the tax work. McGrath leaves government service at the end of the week.

Without commenting on McGrath's decision, Thurmond wrote in turn to Atty. Gen. Edwin Meese III suggesting a new assessment of the antitrust implications of the deal.

Meese Statement

"In order to remove any perception of impropriety, I suggest you consider having the appropriate official at the Department of Justice re-evaluate the antitrust implications of the proposed sale of Conrail to Norfolk Southern," Thurmond said in his letter to Meese.

Meese issued a statement late Wednesday saying: "Mr. McGrath had no knowledge of the retention of the law firm to which he will return next week by Norfolk Southern until the question was raised today."

At the hearing, McGrath defended the Justice Department's scrutiny of the merger proposal, telling the committee that the divestiture requirements would result in there being "roughly the same competitive situation" as before the merger.

But the critics, which include a number of senators, Conrail management and railroads that compete with Norfolk Southern, told the hearing that the merger would create a railroad so powerful it will dominate the Northeast and Midwest rail network.

The Transportation Department, which wants to sell the government's 85% interest in Conrail to Norfolk Southern, argues that shippers will be protected by a requirement that some track must be divested to small, competing railroads in regions where both lines now operate.

Those regions are primarily along an east-west rail corridor that stretches from Illinois through Indiana and Ohio into western Pennsylvania and New York.

But Sen. Arlen Specter (R-Pa.) said the Justice Department was "trying to stick an elephant through a funnel" in its attempt to justify the sale of Conrail to Norfolk Southern.

McGrath acknowledged that his department has made no attempt to determine whether the small railroads, which have been mentioned as competitors to a combined Conrail-Norfolk Southern, would, in fact, be able to compete profitably in the long run.

Norfolk Southern has been negotiating with the Pittsburgh & Lake Erie Railroad and the Guilford System to sell those railroads certain tracks so they would be able to provide shippers an alternative to the combined Norfolk Southern-Conrail network.

But several senators as well as other critics of the merger questioned whether the two small railroads, both of which have had troubled histories, would be able to offer strong competition.

And John W. Snow, president of the Chessie Railroads--part of the CSX system, Norfolk-Southern's major competitor--called the Conrail-Norfolk Southern merger "the most anti-competitive combination ever proposed in the history of the transportation industry."

He said the suggestion that the small regional railroads will be able to compete with the Conrail-Norfolk Southern combination "is nothing short of absurd and ridiculous."

"Guilford will enter into a state of economic serfdom to the Norfolk Southern. It will become a vassal state," he suggested.

Bruce Wilson, Conrail's chief legal officer, told the hearing that Norfolk Southern's takeover would spell the end of competition in the Northwest and Midwest rail region.